CongressLine – Internet Taxation: Caution – Falling Rock Zone Ahead

Carol M. Morrissey has been the Legislative Specialist for the Washington, D. C. office of Chicago’s Sidley & Austin for 11 years. She is a lawyer and legislative expert who has also authored a Congressional update column for the last 4 years.

The States

Approximately 20 states, the District of Columbia and several municipalities already have some form of Internet commerce taxation. Many have since moved to repeal the taxes. In order to exempt the Internet, Florida no longer classifies Internet services as telecommunications services. Tacoma, Washington repealed its 6% tax on network telephone services or Internet service providers.

Colorado and Alabama unsuccessfully attempted this year to exclude Internet providers from state utility and revenue taxation. An exemption bill is currently pending before the Massachusetts Senate which has the support of Governor Weld. California, Illinois, Washington, Texas, Maryland, New York, Utah and Minnesota have created Task Forces to study the question. The commissions in New York and Utah have recommended for exemption and New York has gone ahead and reclassified Internet services.

Congress

The jurisdictional hodgepodge outlined above has prompted several members of Congress to take preemptive action and present legislation to ban new Internet taxes. Rep. Chris Cox (R-CA) and Sen. Ron Wyden (D-OR) have teamed up to introduce the “Internet Tax Freedom” bill (HR 1054 and S 442, respectively) and Rep. Weldon (R-FL) has introduced the “Tax-Free Internet Act of 1997”, HR 995. (For the text of S 442 as introduced, go to http://www.senate.gov/~commerce/legis/legis.htm#comm; for testimony, bill text, news releases, cosponsors, news articles and endorsements to HR 1054, go to http://www.house.gov/chriscox/ and click on “Stopping Cybertaxes in Their Tracks” and for the text of bill, section-by-section analysis, statements and press releases on HR 995 go to http://www.house.gov/weldon and click on “HR 995 – Surf the Internet Tax-Free.”)

HR 995 would exempt Internet, online and e-mail communications from all federal excise taxes. It would also ban all federal agencies from studying the revenue potential of the Internet. Weldon’s bill is wholeheartedly supported by the US Internet Provider’s Association, AOL and Erol’s Online Service.

As introduced, the Cox-Wyden bill imposed an indefinite moratorium on Internet taxation. Not affected under the bill would be State and local taxing authority over income, sales and license taxes. State regulatory agencies and the FCC would be prohibited from regulating Internet access rates as well. Finally, it required the Administration to formulate and present to Congress a domestic and international Internet and interactive services taxation policy within 18 months of enactment and to work on the international level to declare the Internet a “global duty-free zone.” The American Electronics Association, the California Board of Equalization (which oversees the sales tax for the state of California), much of the California State Assembly and the Information Industries Association are just a few of the many organizations which have endorsed the legislation.

A series of public hearings have been held on the Cox-Wyden legislation at which state and local officials have been vociferous in their opposition to the bill. They are arguing not only that the legislation is an infringement on state and local sovereignty, but also that it would strain state and local budgets by costing them billions in property and sales taxes. (For testimony before the House Judiciary committee, subcommittee on Commercial and Administrative Law on HR 1054, held on 7/17/97, go to http://www.house.gov/judiciary/5.htm)

Opposition has been so fierce that the Senate Commerce committee postponed its scheduled June markup of the legislation to give Sen. Wyden more time to work out the details of the bill. The latest version of the bill, which is yet in draft form, would lift the moratorium after Jan. 1, 2003. Notably, the draft also includes a list of state and local tax categories to which the moratorium does not apply, such as cable franchise fee and sales and sales and uses taxes on goods purchased by an Internet service provider. This latest version also includes private sector organizations, such as the National Tax Association, as part of the consultative group required to formulate domestic and international Internet tax policy.

The Administration

Since the introduction of the Wyden-Cox legislation, the Administration has sent mixed signals as to their support of the bill. As recently as June, Vice President Gore stated that the bill goes too far and that the Administration is not supporting the moratorium on new Internet service taxes.

In July, the Administration released, “A Framework for Global Electronic Commerce”, the work product of the Electronic Commerce Task Force headed by Ira Magaziner. (The text of the report can be found at http://www.whitehouse.gov/WH/New/ and click on “Framework”, 7/1/97). On the issue of state and local taxation and electronic commerce, the report declares that, “No new taxes should be applied to electronic commerce, and states should coordinate their allocation of income derived from electronic commerce.” On the international level, it states that the United States will advocate before the World Trade Organization (WTO)and other international bodies that the Internet be a tariff-free zone whenever it is used to “deliver products or services” and that “no new taxes should be imposed on Internet commerce.” Even with the “Framework” as a public document, how the Administration will finally come down on domestic Internet taxation policy remains to be seen.

The Future of Internet Taxation

As it currently stands, it is impossible to satisfy the demands of all the parties involved in this highly flammable issue. The short term resolution may be no resolution at all – Congress and the Administration may choose to study the issue further before taking any concrete steps. In any event, we will have to wait until September and beyond for further action and knowing Congress, it will be shelved as more pressing issues come to call in the flurry of activity at the end of the first session of the 105th Congress. (For the text of the “Framework” and press releases in support of the Cox-Wyden bill, go to the Association of Online Professionals page at http://www.aop.org/)

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